CleanTechnica has spent many years, and thousands of articles, singing the praises of Tesla’s clean disruption of the auto industry and its much touted sustainable energy mission. It’s therefore uncomfortable to admit that Elon Musk’s recent decision to back energy-intensive bitcoin (instead of alternative liquidity de-risking assets) reveals a massive mistake in logic or analysis, and a sharp turn away from Tesla’s core mission.
The reasoning that Tesla gave (in a recent SEC filing) for buying $1.5 billion of bitcoin was as follows:
“[T]o provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity…. we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.” (Tesla SEC filing, 8th February 2021).
Since there are many ways to diversify and de-risk cash holdings, and bitcoin could be accepted as a form of customer payment without the company having to hold onto the asset in any significant quantity, this reasoning does not itself stand up as justification for the substantial bitcoin purchase.
The problem is that bitcoin’s proof-of-work blockchain validation architecture is undoubtedly a negative phenomenon for climate protection compared to alternatives. There are both other more energy efficient cryptocurrencies available to choose from and more established currency-hedging strategies to protect Tesla’s cash pile, if that is indeed the prime objective. Almost any of these would have been much more aligned to Tesla’s often-touted mission “to accelerate the world’s transition to sustainable energy.”
Tesla’s mission is to accelerate the world’s transition to sustainable energy.
— Tesla (@Tesla) May 9, 2019
How Is Bitcoin Climate-Damaging?
The issue is around consensus mechanisms for trustable and accurate record keeping, including validation of transactions. In most traditional spheres of human transaction, trust and accuracy is based on some form of reputation (and/or brand) and backed up by society’s regulations, and, if it should come to it, by processes of redress. VISA Inc., for example, operates an electronic payment transaction system, whose existence is predicated on a reputation for trust and accuracy, backed up by significant regulations (and potential punishments).
Libertarians (mostly of the US ilk) who give the ideological support to cryptocurrencies like bitcoin are opposed to societal regulations and enthuse over ideas of decentralization and anonymity (which preclude trust-via-reputation). These systems therefore have to come up with novel mechanisms to verify transaction records, and prevention of cheating (or simply prevention of data errors). This still involves “demonstration of commitment” to the integrity of the currency and transaction system, not via reputation (and regulations) but via a mechanism of “proof” of commitment.
There’s plenty of complexity to the underlying problems that need to be considered to come up with adequate architectural schemes that meet the requirements for such systems. I’m not going to attempt to address all of that complexity here, but if you feel like a deep dive, you can get an introduction to some of the challenges involved with consensus-architectures in computer systems and related conundrums such as the “Byzantine Generals problem.” More practically, here’s a decent introduction to how another cryptocurrency, ethereum, is currently changing its architecture to reduce the energy usage of its validation process by 99%.
But to put it in simple terms, bitcoin’s verification system uses a “proof of work” mechanism — which involves validators demonstrating computational effort to solve cryptographically secured number-crunching puzzles, and notably, expenditure of significant computational energy in the form of electricity. This puzzle-solving, number-crunching “work” that helps keep accurate transaction records is then rewarded by the allocation of a newly minted bitcoin, which is the payoff for participating in the record keeping task. For this reason, the number-crunching validation work is known as “bitcoin mining,” and results in huge server farms of computers more or less continuously crunching numbers (and using electricity). When the value of bitcoin rises, the value of the minted bitcoin that gets rewarded to validators obviously rises too, and more bitcoin mining (and more energy expenditure) results. The system is explicitly designed to expend significant energy on the security of the validation and record keeping processes, in order to be a demonstration of commitment or “work.”
An alternative approach to participating in the record keeping task of cryptocurrencies is a “proof of stake” mechanism where validators have to front a sizable (and forfeitable) deposit and then get (randomly/evenly) chosen to perform a more straightforward (and less energy intensive) validation task which is also cross-checkable. Again, some reward is given in newly minted “coin” for participation in the record-keeping task. Any cheating (or uncorrected errors) in this record keeping task results in the forfeit of the participant’s deposit (the “stake”). This is the validation architecture that ethereum, mentioned above, is now in the process of adopting.
Still other approaches to ensure system integrity and accurate record keeping exist for other forms of blockchain and cryptocurrency.
The key point here is that bitcoin’s legacy “Proof of Work” mechanism results in a huge amount of energy wasted on number crunching, as a form of commitment signalling, whereas alternative mechanisms for record keeping and validation do not require nearly as much energy and yet produce a functionally comparable end result. In other words, bitcoin’s approach is highly inefficient and wasteful of energy (in the form of electricity) compared to alternatives.
Since electricity generation still mostly requires the burning of fossil fuels in most parts of the world, including in China and the US, where the vast majority of “bitcoin mining” hardware is located, the result is that the bitcoin system creates very significant amounts of carbon emissions.
To counter the charges of inherent inefficiency and climate damage, there are a lot of anecdotes in the bitcoin community around some of the “bitcoin mining” being deliberately located in electricity grid locations where there’s (at least sometimes) a decent proportion of renewable energy supply. But whether renewables constitute a significant proportion of energy used by the overall bitcoin network is not actually checkable, because the whole point is that the distributed participants in the whole bitcoin system are largely anonymous. The mining locations typically simply target cheap electricity, whether this is renewably generated or coal-powered.
Furthermore, even if the bitcoin network did use renewably-generated electricity for a significant proportion of its “work,” since this work is essentially additional and wasteful compared to functional alternatives, there’s an opportunity cost. This is the foregone opportunity of using such renewable energy to instead displace coal-powered energy for the wellbeing of households, and for other basic economic tasks. This broader context makes a moot point of the protestation that bitcoin’s vast energy consumption is “renewable-compatible.”
Every reasonable report about how humanity can keep emissions to a level considered safe(ish) for the climate includes massive reductions in energy use. There is not a single notable report about how to stabilize the climate that doesn’t involve immense improvements in energy efficiency (here’s an example from the IEA). The point is clear: we need to rapidly construct renewable energy power plants, but we also need to rapidly improve energy efficiency. Bitcoin is completely counter to that requirement, and its growth tremendously increases the energy reduction needs in other aspects of the economy.
How big is the scale of bitcoin’s energy consumption footprint and the resulting climate-damaging footprint? Despite the lack of clear data due to anonymity, two analysis projects, the Digiconomist project run by Alex De Vries, and Cambridge University’s Bitcoin Electricity Consumption Index find rough agreement of current annualized consumption in the range of approximately 80 to 120 TWh of electricity per year. At the upper end, that’s an energy consumption rate roughly equivalent to that of the entire country of Argentina or Norway. And bitcoin’s energy consumption is growing at a rapid clip.
In terms of climate damage, processing and validating an average single bitcoin transaction is “Equivalent to the carbon footprint of 678,302 VISA transactions or 51,008 hours of watching YouTube,” according to Digiconomist. Across all transactions, this aggregates to current annualized carbon emissions of around 37 million metric tons of CO2, comparable to the annual carbon footprint of the whole of New Zealand.
The environmental idiocy of Tesla’s bitcoin bet https://t.co/9ODVofp2L1 | opinion
— Financial Times (@FT) February 14, 2021
What’s The Point?
The bottom line is that bitcoin is a legacy, highly inefficient, and climate-damaging cryptocurrency, for which several equivalent but much less destructive alternatives exist. Musk should be fully aware of all of this, but apparently doesn’t care, or doesn’t recognize the risk of this sizable investment in (and support of) the bitcoin bandwagon to the credibility of Tesla’s sustainability mission statement. Tesla famously no longer has a PR department, and Musk himself has not so far offered any coherent comments justifying how this investment in climate-damaging bitcoin is compatible with Tesla’s mission statement. Likely because no such justification is possible (though we’d love to hear one).
Tesla’s success has been substantially underwritten by its ability to attract and motivate world-class talent via it’s world-changing sustainability mission. While Musk has been a positive figurehead in the past highlighting and implementing this noble purpose, his recent move to back climate-damaging bitcoin is completely counter to Tesla’s stated mission.
Why did Musk move Tesla into bitcoin? This seems to have more to do with Musk’s proclivities for libertarian notions of “goddamn freedom” and his being anti-authority and pro-disruption than Tesla’s liquidity needs or progressing its core sustainability mission.
The problem is that Tesla’s bitcoin move undoubtedly flies in the face of the company’s mission and the values of all those colleagues and staffers who joined Tesla precisely in order to fight the good fight for sustainability and against climate destruction. We’re interested to hear Musk’s motivations for moving into bitcoin, and especially how all of the other talented and long-serving folks at Tesla feel about Musk steering the company into this climate-damaging direction. Do they feel betrayed?
Please share your thoughts in the comments (and please indicate whether you’re personally vested).